Nord Stream 2 Will Not Reduce Natural Gas Prices in Europe

Nord Stream 2 AG's Press Service

“If the [Nord Stream 2] gas pipeline is built by the end of 2019 and put into operation in 2020, European families gain access to a lower cost gas source and save €8 billion per year. This will happen due to the fact that prices will decrease by 13 percent.”

Nord Stream 2 will not reduce natural gas prices in Europe; LNG will drive European gas prices in the future

The construction of the Nord Stream 2 pipeline from Russia to Germany under the Baltic Sea hit a snag last month when Denmark’s Energy Agency asked the project developer Nord Stream AG to submit a third permit application for a new route southeast of Bornholm. The request triggered a forceful reaction from Nord Stream AG, which was established to build and operate the Gazprom-owned prospective pipeline. The company had already submitted two route applications and environmental impact assessments, but there has been no decision by the Danish Energy Agency.

In an April 15 press release, Nord Stream AG accused the Danish government of “a deliberate attempt to delay the project’s completion.”

The company also warned that, “in the case of a delay of the project, lack of access to competitive gas supplies will increase price levels throughout Europe. European families and industries will foot the bill of at least 20 million euros – for every day of delay.”

Nord Stream AG’s press service doubled down on its assertions, telling the Russian daily Izvestia: “If the gas pipeline is built by the end of 2019 and commissioned in 2020, European families will get access to a lower cost gas source and save €8 billion per year. This will happen due to the fact that prices will decrease by 13 percent.”

The claim that 20 million euros will be lost for each day of delay – which, according to the company’s calculations, comes to 8 billion euros a year -- is supposed to convince the European public to support what many energy experts view as the Kremlin's geopoliticalpipeline project.

The claim, however, is false.

The numbers cited by Nord Stream 2 AG’s press service were apparently derived from a report commissioned by the company in 2017 to study the effects of the Nord Stream 2 pipeline. The Institute of Energy Economics (EWI) at the University of Cologne found that if Nord Stream 2 were available, less liquefied natural gas (LNG) would need to be imported to the EU, which would lead to lower import prices for LNG. As LNG is the marginal source of supply in the EU, the report says, this would decrease gas prices in the EU.

The report adds: “When Nord Stream 2 is available, Russia can supply more gas to the EU decreasing the need to import more expensive LNG.” This concept is essentially the main premise of the study. It assumes that LNG is expensive and the less Europe imports it, the better off the European consumer would be. However, there are at least three main problems with the report’s assumptions.

Wrong Assumptions

First, LNG imports are not necessarily more expensive than Russian pipeline gas. In fact, the LNG price significantly dropped this winter and, in April, reached $4.92 per million metric British Thermal Units (mmBTU) because of lower demand in Asia. The LNG prices have pushed down Russian gas prices from $8.8 mmBTU in October to about $5 mmBTU now. However, Russiangasprices remain higher in countries with fixed price contracts with Gazprom that are exclusively dependent on Russian energy.

Secondly, Russian gas prices began decreasing in Europe before Nord Stream 2 construction started, precisely because LNG supplies flooded the European market and reached some countries that had been exclusively dependent on Gazprom deliveries.

Thirdly, the report dismisses the fact that the Nord Stream 2 pipeline will not import any new Russian gas to Europe; it will simply divert Gazprom’s current transit through the Ukrainian route to Nord Stream 2.

The study concedes that the Ukrainian transit route, which currently carries the bulk of Russian gas exports to Europe and Turkey (93 bcm in 2017), is included only conservatively in the methodology used to calculate the impact of Nord Stream 2 – envisioned to be used for the transit of only 30 bcm or less a year. ​

Natural gas flows into EU; table from Nord Stream 2 commissioned report by Institute for Energy Economics at the University of Cologne, Germany

LNG Prices Going Down

Natural gas prices in Europe have been going down this year not because Gazprom is building two new pipelines under the Baltic and Black seas, but because the continent has been flooded with LNG since last fall. LNG has been coming from a number of suppliers, including the United States. A mild winter in Asia has driven gas prices to a three-year-low level and caused LNG shipments to be redirected to Europe, pushing down the prices there as well.

European natural gas prices in April were as low as in the summer of 2016, when gas prices were affected by plummeting oil prices. Energy experts say LNG has allowed natural gas to become a global commodity that can easily move from one continent to another depending on demand, similar to the way oil is traded. Natural gas has been “freed from an old regime of rigid contracts with fixed destinations,” the Financial Times wrote.

While Russia continues to build gigantic pipelines to Europe and Turkey, LNG will drive gas prices in Europe in the future, according to Niall Trimble, managing director of oil and gas consultants The Energy Contract Company.

Gazprom vs. LNG

Commenting on the putative 8 billion euro potential savings for European gas consumers if Nord Stream 2 is built, Anders Åslund, a Senior Fellow at the Atlantic Council, told Polygraph.info that the Russians are constantly coming up with bizarre numbers to protect and expand their gas market share. “The cost of Russian natural gas is indeed lower than LNG, but who benefits from it? Only the producers, not the consumers,” Åslund said. “Gazprom can be more flexible with the sale prices, but it is not.”

“Gazprom is not building its project in order to save European consumers money; in fact, it is building it to maintain and entrench its positions on the European markets right at the time when Europe is seeing more options and more liquidity,” Agnia Grigas, a nonresident senior fellow with the Atlantic Council's Eurasia Center, told Polygraph.info. She added that the Nord Stream 2 project is Gazprom’s way of fighting against the competition, an attempt to lock the European market by tying it to Russian pipelines in order to preempt alternative gas supplies.

“I certainly don’t expect gas prices to drop; on the contrary, in countries where Gazprom has established positions, gas prices tend to rise,” said Grigas.

Lithuania’s experience demonstrates this: as soon as Vilnius started planning to build an LNG regasification terminal at Klaipeda, Gazprom had to decrease its prices in Lithuania.

Kremlin’s Mega Pipeline

The Nord Stream 2 pipeline, which is currently under construction, would run in parallel to the existing Nord Stream 1 pipeline from Russia to Germany on the Baltic seabed. If completed, it would double the system’s total capacity to 110 billion cubic meters (bcm) per year. This would equal 70 percent of Russia’s natural gas exports to the EU, all slated for direct delivery through a single transit route to one country, Germany.

Russia is the largest exporter of natural gas to the European Union. Russia has about a 36-percent share of Europe’s natural gas market. In 2018, it delivered 156 bcm of gas to the EU via pipelines through Ukraine, Belarus and Germany. Russia supplied 43percent of the total EU gas import of 363 bcm. The Ukrainian transit route delivers the largest share of these exports; in 2017, it transmitted 93.5bcm to Europe and Turkey, which was reduced to about 86.8 bcm in 2018.

However, several European countries and the United States have opposed the pipeline, seeing it as a political project designed to bypass Ukraine as a transit country, divide the EU and undermine the budding LNG market in Europe. In addition, the pipeline will undercut the main principles of European energy security developed after the gas crisis in 2009 and aimed at curtailing dependence on Russian energy and promoting the diversification of energy sources.

Moscow claims that the project is purely commercial, designed to meet increasing gas demand and decreasing gas production in Europe. But its demand estimates seem exaggerated as the BP forecasts that European energy consumption will actually decrease by 13 percent in 2040, with gas demand also decreasing by 3.7 percent. Europe's gas import ratio will rise, however, from 75 percent to 88 percent.

Furthermore, Gazprom does not need another 55-bcm pipeline when it has almost 100 bcm of currently unused export capacity to the EU, about 40 percent of its transmission capacity to Europe is not utilized.

Nord Stream 2 advocates, such as former U.S. Ambassador Richard Burt, a managing partner with McLarty Associates, which lobbies for the pipeline in Washington, claims that this enormous extra capacity is needed for winter peak demand, denying there is intent to eliminate Russian gas transit via Ukraine.

However, Alan Riley, a Senior Fellow at the Institute of Statecraft, London, and Senior Fellow at the Atlantic Council, is categorical about the effect on Ukraine: “If Nordstream 2 comes into operation, then the Brotherhood pipeline will see a collapse in gas flows transited across Ukraine.”

UKRAINE -- FILES -- A worker turns a tap at the gas-compressor station in Mryn village, about 130 km of Kiev, Ukraine, 15 October 2015.

The Trouble in Denmark

Following the request for a third route that was eventually submitted, Nord Stream AG CEO Matthias Warnig cautioned the board of his company that the process of appealing Denmark’s decision could take years, wrote the Polish website BiznesAlert.pl after obtaining the letter. While an appeals process is ongoing, Denmark can put on hold a decision on any other alternative route proposal.

Such an outcome would inevitably delay the completion of Nord Stream 2. Moscow had hoped to eliminate or reduce to a minimum Russia’s gas transit via Ukraine by January 2020, Russia’s energy minister Alexander Novak indicated in an interview for Gazeta.ru in February. But if Nord Stream 2 is delayed or canceled, Gazprom will have to continue using the Ukrainian route past 2019.

Faced with that possibility, Nord Stream 2 AG has launched a PR campaign of statements and interviews to argue that if the pipeline is not completed by the end of 2019, Europe will pay a lot more for natural gas and if it is built on time, European families can save 8 billion euros a year.

However, we find this claim that Nord Stream 2 would save consumers money to be false.

GERMANY -- Men work at the construction site of the so-called Nord Stream 2 gas pipeline in Lubmin, March 26, 2019